Going Green

By Graham Farran

I recently took a continuing education class all about Going Green, something I didn’t know much about, so I was surprised by what I learned and how much each of us can impact our environment. It was a great class and information worth sharing.

It’s surprising that focus on our environment really didn’t begin until 1969 in the United States. It was then that a series of river fires plagued our nation. Rivers in industrial areas were so polluted with chemicals from factory run off that they caught on fire, and that caught the attention of the public. During the same period, we also saw a decline of certain species, including our national bird, the bald eagle, which became a concern. Out of this concern came Earth Day in 1970, and then-president Richard Nixon formed the Environmental Protection Agency (EPA) to protect our environment.

So, what does “Going Green” mean? It means understanding that there are consequences to the environment for the resources we use and the choices we make. We can reduce our effect on the earth by reducing our ecological footprint which is much more encompassing than our carbon footprint. The 4 major ways we can control and reduce our ecological footprint are:  1) The food we eat, 2) Goods and Services we buy and use, 3) Mobility or how we get around, and 4) Homes we live in. For this article, I’ll just focus on one of the four, “Homes we live in”, and 5 ways we can improve our “Ecological Footprint” and make our homes greener.

#1 Energy Use: Decrease our energy use

Homes are one of the biggest contributors to carbon gas emissions. There are lots of ways to save energy in our home and there are many tips below. You may want to start by getting a “Energy Audit” by a 3rd party that looks at your insulation, windows, doors, and the amount of energy to heat and cool your home. You can find vendors at this URL: https://www.energy.gov/energysaver/weatherize/home-energy-audits.

  • Add a programmable thermostat – only run the HVAC when needed
  • Wrap your water heater with insulation
  • Add Solar tubes – take advantage of natural lighting
  • Close the fireplace damper while not in use
  • Run the dishwasher only when full
  • Use insulated window curtains to block the heat in the summer but let it in during the winter
  • Switch to all LED lighting
  • Buy Energy star appliances
  • Add solar panels – use natural light
  • Glazing or tint windows to keep the heat out in the summer
  • Add ceiling fans to circulate the air
  • Add dual or triple pane windows
  • Alter your landscaping by adding tall trees that shade the house
  • Buy an energy efficient HVAC. There is a SEER rating for efficiency of HVAC systems. The higher the number the better – 14 or higher is good

2) Water Efficiency: Conserve water by adding features that decrease indoor/outdoor water use

  • Add low flush toilets OR dual flush toilets
  • Replace your water heater with a tankless water heater
  • Install low flow shower heads
  • Add water collection devices. Rain barrels, capture rain water from the downspouts
  • Reuse the grey water from your sink for your yard
  • Landscaping for energy efficiency. Use natural landscaping in your area that doesn’t require supplemental irrigation

3) Sustainability: Using renewable products is a key

  • Consider renewable and resource-efficient materials
  • Eco-Friendly flooring such as Bamboo, Cork or Hemp
  • Recycled flooring
  • Walking Score – when you buy a new home look at its walking score, can you walk to services?

4) Materials used:  Any time you update or remodel consider using environmentally friendly products

  • Use recycled glass products for
    • Countertops
    • Flooring
    • Backsplash
    • Lamps
  • Linoleum vs vinyl is more eco-friendly
  • If you are adding insulation, consider recyclable
    • Cotton
    • Cellulose – recycled paper

5) Indoor environmental quality: Be healthier and safer for occupants

  • Use Eco-friendly carpeting with natural fibers
  • Use natural insect repellants
  • Use green paint, VOC paint (Volatile Organic Compounds)

There are many benefits to “Going Green”, such as reducing your carbon footprint, saving money, tax incentives and a healthier lifestyle. If we all implemented just a portion of the ideas presented in this article it would make a huge difference to our “ecological footprint” and go a long way to protect our environment ensuring future generations clean water, clean air and the beauty of nature.

6 Ways Real Estate Builds Your Wealth

By Graham Farran

 

 

Real Estate has been a great investment for me and many of our companies’ clients. Many novice investors look at appreciation as the main benefit to investing in Real Estate, but I see that as just icing on the cake.  Here are the 6 major ways that you can build wealth with real estate.

#1 Real Estate gives you Predictable & Stable Income.

In any area you can find out what the “market rent” is and it’s very consistent. Rents in Southern Oregon run around $1 per square foot, higher in areas like Jacksonville and Ashland and cap out at about $3500 month regardless of the home. When you invest in Real Estate you can predict almost exactly what your income will be.

#2 Real Estate Investments can be Leveraged

Your investment can be 4 to 5 times greater than your down payment. The lending bank requires 20% to 25% down for an investment property and they will invest 75% – 80%. So, with $40,000 down you can buy a $200,000 investment. When it comes to your return on investment, you make a return on your cash investment or you can make a return on the spread between the interest on the loan and the rate of return on the property. In some cases, the leverage can be a lot higher; like buying a home with only 3% or 4% owner occupied financing and then turning it into a rental after a required one-year period of living in it. You can also buy a duplex or tri-plex with a small down, owner-occupied loan then live in one of the units and rent out the rest. Where else can you use other people’s money to buy and investment? You can’t borrow $200,000 to invest in the stock market and secure it with the stock you buy. So, leverage is, to me, the biggest benefit for investing in Real Estate.

#3 Real Estate Appreciates in Value

While appreciation is not guaranteed, real estate values in the US have increased an average of 6% a year over time. I always analyze a real estate investment based on its return without adding in appreciation, and see appreciation as icing on the cake.

#4 Real Estate Provides Equity Buildup

Equity builds in two ways.  Every year your tenants rent checks go towards paying down your mortgage so you build equity by debt reduction. At the same time appreciation causes home prices to go up which also causes your equity to build, so your equity grows in two ways

#5 Real Estate is Improvable

You can increase the value of your investment property with “elbow grease” and “sweat equity.” Real Estate is an investment that with hard physical work you can personally increase its value, or write a check to a contractor to improve its value.

#6 Real Estate provides many Tax Breaks

There are 4 ways of saving on your taxes by investing in real estate.

  • DEDUCT all expense incurred in owning real estate. Property upkeep,
    maintenance, improvements and interest paid on the mortgage. The deductions offset income and reduce your overall taxes.
  • DEPRECIATE your rental home (minus the value of the land). The deductions offset income and reduce your overall taxes.
  • DECREASED tax rate when you sell real estate. Real Estate profits, whether they be rent income or profits for the sale of a home are subject to capital gains tax which is far less than the tax you pay on earned income.
  • DEFER any taxes due by using a 1031 Exchange. As long as you re-invest in like properties, your profits from a real estate investment never get taxed until you sell that investment property and don’t re-invest. What I’m seeing now is elderly couples passing away and leaving their real estate investments to their children who, upon inheriting the properties get to value those properties at current value without paying any taxes. Taxes are only paid if they sell those investment properties in the future for more than the value of which they inherited it, and then, they only owe tax on the value that it has appreciated since they inherited it.

So, how do you get started?

Unless you can come up with 20 – 25% down for an investment property the best way to get started is buy a home, live in for one year, then convert it to a rental home. By doing this you can get an owner-occupied loan with as little as Zero to 3% down.  You can even buy a duplex or tri-plex, with an owner-occupied loan and live in part if and rent out the rest. If you already have a home, see if you have enough equity to borrow against for the down for  your first rental property.

Once you own your first rental property, it’s much easier to get the down for your second rental property. Here are three ways:

  • Save the profits from your first rental property
  • Borrow against the equity of your property (HELOC loan) 
  • Refinance your rental home and take out the equity

As time goes on and you have many rental properties, you can accelerate the acquisition of your rental properties. You can use your rental profits or equity to buy a few rental properties per year. You can count your rents minus your expenses as income to qualify for more investment loans. My personal experience has been I’m busy with my day job so when I get around to looking at the equity in my rental homes, I’m always pleasantly surprised. I find that the loans have been paid down substantially enough to give me a debt reduction and appreciation has caused the value of the home to go up substantially, even doubling in some cases. After I analyze how much equity I have built up the only questions is…. what can I buy next?

Here Comes the Hemp

In the last few months we have seen an explosion of hemp fields being planted along every road you drive as hemp quickly becomes the largest agricultural crop, surpassing pears and vineyards, in Southern Oregon. Based on statistics from the Oregon Department of Agriculture, Jackson County has 8,578 acres planted giving the county the distinction of being the largest grower of Hemp in Oregon. To provide some idea of the scale of hemp, Jackson County has 2,850 acres of grapes and 3,800 acres of pears.

The question becomes, what will be the effect of Hemp on our valley? Is Hemp a boom to our local economy because of the high demand, or a determent, because it is a cousin of cannabis and has a distinctive odor that some find objectionable.

Hemp is one of the fastest growing plants and can be used to make a variety of commercial and industrial products, including rope, textiles, clothing, shoes, food, paper, bioplastics, insulations, biofuel and on and on. In Southern Oregon, it is being grown mainly for CBD, or cannabidiol, which some studies suggest result in various health benefits as they react with the human body’s endocannabinoid system. I’m not sure what that means, but I do know many of my friends and family tout CBD’s healing capabilities in helping depression, anxiety, pain, and sleep disorders. Although I haven’t read a lot of conclusive research yet, the FDA has approved a drug using CBD called “Epidiolex” for the treatment of seizures associated with epilepsy. The FDA is in the process of testing many drugs using CBDs so how wide spread its use will be in prescription medicines, will soon be known.

The short-term effect on our local economy is being felt. Across our valley, pear growers, cattle ranchers, hay growers, farmers and those with pasture land that may have sat empty for years are now leasing their properties to Hemp growers for $1,000 – $5,000 per acre for the season. It’s great to see our local farmers making money again. Even minimum wage workers can leave their jobs for Hemp field work that starts at $14 an hour and goes up to $20 hour, all paid above the table, with taxes and Social Security. As for the Hemp growers they can yield $40,000 to $50,000 per acre, but the upfront costs to get the field ready can run to $20,000 an acre.

A rough calculation based on the 8,578 acres planted in Hemp times $40,000 an acre adds up to a crop that can boost the Jackson County agricultural economy by more than $340 million this year.

My personal view comes from living in rural Sonoma County and working in the San Francisco Bay area prior to moving here. The area I lived in was all farm land and once a year the dairy farmers would spray all their fields with a fertilizer consisting of cow poop and water. That caused quite a smell and attracted swarms of flies for about a month. You quickly got used to living in a rural area among farms and I realized fertilization was a necessary part of farming. Also, being from the SF Bay area, which was home to thousands of high-tech companies, I was surprised by the lack of good paying jobs and the lack of a successful economic base when I moved here. The greatest growth that I have seen in our local economy has come from tourism, the wine industry and the increasing number of escapees and retirees who move here and bring their money or jobs with them. It just feels really good to see our local economy growing from within, and the thought of adding over $300 million in to the economy is a nice boost to all of us.

Time will tell if the demand for Hemp increases and if the climate in Southern Oregon, the local expertise and the facilities will sustain a strong industry for the foreseeable future. But for now, let’s enjoy the growth in our local economy and remember, when you smell that distinctive odor, you may be smelling the smell of success.

 

To Be Retired In Jacksonville

For years we have helped retirees find their perfect retirement home in Jacksonville. It’s very enjoyable seeing their excitement as we tell them all about Jacksonville and Southern Oregon. Most of them have come from out of state so there is lots of education that goes on. From home prices, cost of living, weather, outdoor activities, theaters, restaurants, music scene, shopping, wineries, and culture; there can be lots to learn and lots of differences from the areas they are moving from.

This education has worked both ways as we have learned a lot from our retiring clients. We have seen a lot of smart planning, with some of our clients buying homes in Jacksonville years before they retire. They have us manage their retirement home as a rental home, giving them a yearly passive income until they are ready. When they do retire, they do so in a home that has appreciated in value and may be way beyond what they might currently spend for a retirement home. We have also seen retirees do a 1031 exchange from a rental property they own out of state to their future retirement home in Jacksonville giving them tax advantages.

We have also seen, from our newly retired clients, what a retired lifestyle looks like living in Jacksonville. One of my favorite stories is a day I walked into South Stage Cellars at two in the afternoon to pick up my credit cards I had inadvertently left the night before. As I entered the tasting room, I was greeted by four of my newly retired clients, all at the bar wine tasting. They quickly offered me a seat but I had to decline, telling them I had three more appointments to attend. It must be nice to be retired.

Just recently we had family visit us for a week and we decided to have a staycation and pretend we were retired without worries and with less responsibility. As it turned out, it might have been one of our best vacations. The first day started without the alarm going off and we wandered down the street to Good Bean for breakfast. There you could see tables of retired men and women, in what look liked a weekly gathering, catching up with each other. After breakfast we took our visitors on a tour of downtown, stopping at each eclectic store, buying gifts and gadgets you’ll never see in malls. Soon lunch came and we found ourselves in the sun on the back porch of Bella meeting up with the rest of our family. That evening we hiked up the hill to see The Little River Band at Britt, from our seats in front of the stage. It was a great concert, and I could only think of how lucky we are to live in a great town that just happens to have an amphitheater that attracts some of the best live music and comedy acts I have seen.

The next day involved an early morning hike in the Jacksonville woodlands, breakfast at Mustard seed, lunch outside at Jacksonville Inn and then on to wine tasting at South Stage Cellars. That evening we headed out to Red Lily to picnic on the Applegate River, hear live music and enjoy the beauty of the surroundings. We even watched a river otter swim up stream.

On the third day we woke up late, took a trolley ride around Jacksonville then headed to DANCIN for a great meal, great views and some great Pinot Noir. After that, we took our grandkids for ice cream under the La Fiesta restaurant. The kids were more enamored by the spoons that changed colors as they got cold than they were by the ice cream. For the adults, we were just grateful to hang out with the kids as an excuse to enjoy ice cream. After an afternoon nap we had a big BBQ at home for our guests and all of our family, then sat in our front yard and watched the energy build as 2000+ concert goers ascended up the hill to that evening’s concert. The evening was topped off when Jacksonville came alive with those 2000+ somewhat inebriated concert goers descending down the hill, many staying to enjoy the local restaurants, pubs and bars.

The staycation could have ended here, but on the fourth day, we headed up to Lake of the Woods for three more days. We swam, kayaked, boated, BBQed, hiked, roasted smores on the fire and reveled in the smells and sights of the high mountains. We even took a drive to Crater Lake, ending up at the historic lodge for lunch then sitting on the rocking chairs overlooking the lake.

We headed back to Jacksonville for the last day of our pretend retirement. We hung out at Daisy Creek Vineyards, listened to live music and talked about not what we did, but what we didn’t do. There wasn’t enough time to raft or Jet boat the Rogue River, go wine tasting in the Applegate Valley, see a play at OSF, go to a dinner show at the Cabaret, drive to the Redwoods or try the Jacksonville Segway tour.

The week went by too quickly, and when we dropped our relatives off at the airport, they vowed to do this again next year – another staycation in Jacksonville pretending we are retired. As we drove back into town, we realized Jacksonville is not a town, it’s an experience.

The Law of Averages

Every month I read the real estate sales statistics in the Mail Tribune that are provided to them by the Rogue Valley Association of Realtors. All the numbers are averages, or medians, calculated for the last 90 days.  Overall, they are reporting a seller’s market which means limited inventory for buyers and homes selling in 60 days at 96.9% of the asking price. This is true for a lot of home sellers, but not so for many others. The problem with using averages is that most homes are above or below the average. Price point and location are the two greatest factors in real estate and they determine how quickly your home may sell and for what percentage of the asking price.  Looking at the chart below, you can see how it is a seller’s market until you get into $700,000 + priced homes then it starts to become a buyer’s market with over 6 months of inventory.  While the average months’ supply of inventory may be 2.2 months, it’s more than 12 months for homes priced over $2,000,000. You can see how the price point of the property determines if it’s a buyers or sellers’ market.

Price point determines days on the market, % of asking price sellers receive, and how long it will take to sell.  However, there is another factor, and that is LOCATION. If we redid the chart above and added price per location, it gets more complicated. A $700,000 home in Butte Falls or Shady Cove will take much longer to sell than a $700,000 home in Jacksonville or Ashland. So, if you’re selling and you really want to know how long it will take and what you’re likely to end up making, don’t look at averages.  Instead, ask your Realtor to calculate the numbers based on your specific price point in your specific location and you’ll know exactly what the road ahead will look like.

6 Ways to Lower Your Tax Rate by Owning Rental Property

If you just finalized your 2018 Tax Return and you’re now focused on how to “legally” lower your tax rate for 2019, you should read on. There are lots of tax benefits of being a landlord, most all expenses are tax deductible, from finding tenants to fixing faucets. The benefits of cash flow and tax deductions can make owning rental properties worthwhile. 

1. Tax Deductions for Landlords
Many rental home expenses are tax deductible. Save receipts and any other documentation, and take the deductions on Schedule E. Figure you’ll spend four hours a week, on average, maintaining a rental property, including record keeping.
 
In general, you can claim the deductions for the year in which you pay for these common rental property expenses:
 
•Advertising
•Cleaning and maintenance
•Commissions paid to rental agents
•Homeowner association/condo dues
•Insurance premiums
•Legal fees, Accountant fees, Property Manager Fees
•Mortgage interest
•Taxes, including property taxes
•Utilities

2. Travel Expense Deductions
You can deduct expenses for local travel to a rental home for activities such as showing it, collecting rent, or doing maintenance. If you use your own car, you can claim the standard mileage rate, which is 54.5 cents per mile, plus tolls and parking.
Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relates to rental activities.

3. Repairs and Improvement Deduction
Another grey area is repairs vs. improvements. The tax code lets you immediately write off repairs (any fixes that keep your property in working conditions) as you would other expenses. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years.
Think of it this way: Simply replacing a broken window pane counts as a repair, but replacing all of the windows in your rental home counts as an improvement.

4. Depreciation
Depreciation refers to the value of property that’s lost over time due to wear, tear, and obsolescence. In the case of improvements to a rental home, you can deduct a portion of that lost value every year over a set number of years. In general, you depreciate the value of the home itself (but not the portion of the cost attributable to land) over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.
Depreciation is a huge tax benefit, but the calculations can be tricky. Read IRS Publication 946, “How to Depreciate Property” for additional information.

5. Profits and Losses on Rental Homes
The rent you collect from your tenant every month counts as income. You offset that income and lower your tax bill by deducting your rental home expenses including depreciation. If, for example, you received $9,600 in rent during the year and had expenses of $4,200, then your taxable rental income would be $5,400 ($9,600 in rent minus $4,200 in expenses).
You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.
If your modified adjusted gross income (same as adjusted gross income for most persons) is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.
Let’s say that for the year rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss. If your modified adjusted gross income is below $100,000, you can deduct the full $3,000 loss. If you’re in a 22% tax bracket, a $3,000 loss reduces your tax bill by $660, plus any applicable state income taxes.

6. Tax Rules for Vacation Homes
If you have a vacation home that’s mostly reserved for personal use but rented out for up to 14 days a year, you won’t have to pay taxes on the rental income. Some expenses are deductible, though the personal use of the home limits deductions. The tax picture gets more complicated when, in the same year, you make personal use of your vacation home and rent it out for more than 14 days.
 
Being a landlord is not for everyone, but those who want a passive income stream, with lots of tax write offs, will prosper.